Backed by high-quality mines in China, Dazhong Mining focuses on the development of iron ores and lithium mines to drive the secured supply and production capacity ramp-up of key strategic resources. With the growth of the Company’s iron ore sales and production, and the completion of the lithium mine project, we expect its earnings to return to high levels in 2024. We forecast its 2023E/24E/25E attributable net profit (ANP) to be Rmb1.011bn/1.524bn/2.013bn. Considering the average comps valuation, we assign 15x 2024E PE, corresponding to a target price of Rmb15, and initiate coverage with a “BUY” rating.

Dazhong Mining, as a leading domestic independent player in iron ore beneficiation, has ventured into the new energy materials value chain.

Established in 1999, Dazhong Mining has been mainly engaged in iron ore beneficiation, the production and sales of iron concentrates and pellets, and the processing and sales of the byproducts of manufactured sands, with iron concentrates and pallets as its main products. In 2022, the Company's revenue and ANP reached Rmb4.058bn/0.977bn, respectively, down 17.1%/39.9% YoY, mainly due to the impact of declining product prices. At the end of 2022, Dazhong Mining announced an investment of Rmb16bn to build a project for lithium extraction from micas and lithium battery material production in Linwu, Hunan, proactively venturing into the lithium resource extraction value chain.

The domestic iron ore beneficiation industry embraces tailwinds, bolstering the strategic significance of developing local lithium mines.

Given the relatively scarce domestic supply of iron ores and the robust demand from the vast downstream steel industry, we estimate that the dependency ratio of China’s iron ore imports has consistently remained above 80%. The Cornerstone Plan launched in Mar 2022 to raise China’s self-sufficiency rate of steelmaking raw materials may be favorable for the development of domestic iron ores. Furthermore, according to the data of US Geological Survey (USGS), China's domestic lithium resource reserves account for only 8% of the global total and are unlikely to meet the demand from downstream new energy industries. Achieving self-reliance and control over domestic lithium resources holds paramount strategic significance for China. From the supply perspective, lithium micas have become an important lithium source in addition to brines and spodumenes.

Dazhong Mining boasts excellent endowment of iron ore resources, and its capacity expansion enhances its scale advantages.

With two major operation bases established in Inner Mongolia and Anhui, Dazhong Mining has a combined iron ore reserve of 516mt, wielding a significant reserve advantage among independent iron ore beneficiation companies. Currently, the Company possesses a capacity of around 15mtpa for iron ores and 2.7mtpa for pellets. With the rollout of beneficiation technology reform in the Chongxinji iron deposit, the Zhouyoufang iron deposit and Hejiao iron deposit, and the commissioning of the pallet projects, we expect its long-term iron ore capacity to reach about 20mtpa, with pellet capacity reaching 4.2mtpa. Dazhong Mining has acquired Jinhui Rare Mining and is poised to realize self-sufficiency in calcined iron powders for pellets.

Dazhong Mining has an edge in costs with a sector-leading GPM.

Due to the higher grade of iron ores, coupled with the self-operated beneficiation process, the raw material costs of Dazhong Mining are relatively low. Furthermore, the Company adopts advanced ore selection techniques and streamlined processes, resulting in lower costs. According to the Company’s 2022 annual results, the average production cost of iron concentrates was Rmb320.8/t in 2022, down 12% YoY, lower than the comparable companies in the same industry, such as Jinling Mining, China Hanking, and Hainan Mining. The gross profit margin (GPM) for the Company's iron concentrate business was 64.0% in 2022, higher than the industry average by 19ppts.

Dazhong Mining has been constructing a mica lithium extraction project, proactively venturing into the low carbon value chain.

According to the Company’s announcement, Dazhong Mining signed an investment cooperation agreement with Linwu government in Nov 2022, agreeing to invest Rmb16bn in the mica-rich Xianghualing ore field to build a project with an annual production capacity of 40ktpa for lithium carbonates, and 160ktpa for lithium iron phosphate cathode materials, as well as 20GWh lithium batteries. Though tapping the field of lithium mining for the first time, the Company has already possessed mature mica beneficiation technologies and rotary kiln calcination processing. Besides, its entry into the lithium battery industry is conducive to further enhancing its core competitiveness and long-term profitability.

Potential risks: The fluctuations in product prices; the Company's production capacity expansion not meeting expectations; production safety issues; excessively high lithium resource extraction costs; a sustained decline in lithium prices; the unsuccessful renewal and conversion of the Company's exploration rights into mining rights.

Investment recommendation: With the growth of Dazhong Mining's iron ore product production and sales, along with the completion of the lithium mining project, we expect the Company's earnings to return to high levels in 2024 with a significant increase compared to 2023. We forecast its 2023E/24E/25E ANP to be Rmb1.011bn/1.524bn/2.013bn, equivalent to EPS of Rmb0.67/1.01/1.33, corresponding to 17x/12/x9x PE at the current share price. We selected domestic listcos engaged in iron ore beneficiation, including Baodi Mining (601121.SH), Hainan Mining (601969.SH), Jinling Mining (000655.SZ), and HBIS Resources (000923.SZ), as comparable companies. As of Aug 14, the PE forecasts for the abovementioned companies were averaged at 17.3x/14.3x for 2023E/24E based on Wind consensus estimates. Considering that more than half of 2023 has already passed, and the Company's lithium mining business is likely to contribute to earnings starting from 2024, we select the 2024 earnings forecast as the base and assign 15x 2024E PE, corresponding to a market cap of Rmb22.9bn, and arrived at a reasonable target price of Rmb15 per share. We initiate coverage with a “BUY” rating.